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Ask a Lawyer // September 2016 // Independent Contractor or Employee? Misclassification can be costly

Written by
Matthew S. Johnston
Published
September 7, 2016
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I recently had a client who had to terminate an employee for largely business reasons (there was some minor misconduct issues, but essentially it was a lack of business for this employee to be a full time worker.) The split was as amicable as any termination could be and everyone had gone their separate ways. Then last week, it turns out that my client needed the services of this former employee for a discrete project. At roughly the same time, I had a potential client call me about setting up an independent contract relationship with a current employer.

So what is the connection between these two cases? Simply put, the perception of having former employees suddenly appear as independent contractors is a monster red flag to the government. Trust me, even if everyone is on the same page and actually wants the arrangement to go forward, the government has different ideas.

In the design industry, independent contractor and freelance arrangements are common and if properly documented and reflect a reality of two separate and real businesses, the independent contractor arrangement is a great and flexible. But when the worker shifts from employee to independent contractor, it is assumed that the independent contractor is being exploited.

So how do you know if you can legitimately hired a former employee as an independent contractor? Resolution of the independent contractor vs. employee question is tricky because the analysis is very fact specific. By some counts there are as many as 48 factors to consider when determining if a worker is an independent contractor or an employee. The burden of proof is always on the employer, the business, to prove a person is an independent contractor. Picking the most important factors is difficult because the analysis is so fact driven. But here are a few factors to consider and document in the case that the independent contractor you are considering is a recently terminated employee:

  1. How close to your core business is the service that is going to be provided by the independent contractor? If you are a design firm and you are hiring a designer to work on a client matter, your former employee is going to be difficult to classify as an independent contractor. If the designer is redesigning your company’s website, you might be okay all other factors considered.
  2. Does the former employee have a legitimate business with many other clients? The more clients they have, real legitimate and paying clients, the better. What you are trying to demonstrate is that the independent contractor is not economically reliant on working with your company.
  3. Do you exert any significant control of the means and methods for completing the work? Deadlines, format of final work product, and milestones are acceptable. Telling the contractor/former employee when, where, and how to do the work is an employer providing direction.

So what happens if, after the analysis, it turns out that the former employee and now wanna-be contractor can’t actually be retained as an independent contractor? Rehire the former employee for the project. Make clear that the rehire is for the duration of the project and that other employee benefits are not available. But there is nothing wrong with a short term employee that is paid like any other employee, even if that employee has been terminated a while back.

Clearly, you might not want to hire someone you terminated for cause. But even employees who resigned can be retained as independent contractors, but care must be taken to document the actual independence of the former employee. Of course, having a state of the art independent contractor agreement is a good start, but it is no longer enough. Some documentation beyond a contract can help:

  • Ask for current, active client references, then actually calling and documenting the references.
  • Determine if the contractor has employees of its own.
  • Ask for the contractor’s advertising or promotional materials, indicating the contractor is actively soliciting other business.
  • Ask for an EIN and a copy of an operating agreement or corporate bylaws.

Given that the government has a bias to finding an employment relationship and some states even look poorly upon independent contractors (see, e.g., California), hiring a former employee is a tricky situation. Please consult an attorney before taking this step. I am not saying it can’t be done, but you have to be careful.


MATT JOHNSTON IS A SOLO ATTORNEY WITH A FOCUS ON SMALL BUSINESS REPRESENTATION, COPYRIGHT AND TRADEMARK LAW, AND DISPUTE RESOLUTION. MANY OF MATT’S CLIENTS ARE DESIGNERS AND CREATIVE PROFESSIONALS WHOSE CONCERNS OVERLAPPING MATT’S PRACTICE AREAS. MATT CONCENTRATES ON DRAFTING CLEAR CONTRACTS OF ALL TYPES AND HELPING DESIGNERS WITH THE LEGAL SIDE OF THE DESIGN BUSINESS. AS A BENEFIT TO AIGA MEMBERS, MATT OFFERS A 10% DISCOUNT ON ALL CONSULTATION APPOINTMENTS, FLAT FEE PROJECTS, AND HOURLY FEES.

THE CONTENT OF THIS COLUMN IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE APPLICABLE IN ANY SPECIFIC SITUATION. NO ATTORNEY-CLIENT RELATIONSHIP IS CREATED THROUGH THIS COLUMN. IF YOU NEED CONFIDENTIAL LEGAL ADVICE, MATT IS AVAILABLE FOR PRIVATE AND PRIVILEGED CONSULTATIONS. CONTACT MATT IF YOU HAVE SPECIFIC CONCERNS

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